HHS, default choices and subsidy shocks

The Boston Globe has an interesting piece on the perils of default selection criteria for the 2015 Exchange open enrollment period.I think the piece has a good amount of information in it, but I don’t think it is as clear as it could be.

Here’s the issue, in a nutshell:

To streamline next year’s open enrollment season, the Health and Human Services Department recently proposed offering automatic renewal to 8 million consumers who are already signed up.

But the fine print of the HHS announcement said consumers who auto-enroll will get ‘‘the exact dollar amount’’ of financial aid they are receiving this year.

From my understanding, HHS has a nasty problem. All sorts of behavioral economics research indicate that forcing people to make new choices where the default is to choose nothing leads to no coverage, will lead to quite a few people to drop out of the market even though they would usually want to get back in. Opt-ins are poor choice structures. So HHS has to find an opt-out method. Due to data limitations, they are creating a default that assumes 2015 choices and financial situation will be exactly the same as 2014 family, finances and choices. Is this a good method? Not really. Is it a defensible method to make sure people don’t fall through the cracks? Yes.

What are the weaknesses?

We have to remember that subsidies are calculated with two independent functions. Total subsidy is the difference between the market price of the chosen plan minus the combined function of a given percentage of family income for a given FPL level and the market price of the second cheapest silver

The first function is the family’s income situation. Basically this is a combination of how much income does the family pull in, and how large is the relevant portion of thefamily. There are a couple of failure points in the default assumptions being made by HHS. It does not take into account changes in income from either new jobs, fewer hours, pay rate changes. For instance, if my family was on the Exchange this year, HHS’s default assumptions would not recognize my recent pay raise unless I enter that data into Healthcare.gov. The other significant failure point is family size. If my brother was on the Exchange as a single male, and he got married in December instead of July, his subsidy, as well as the subsidy for my new sister in law would be calculated on their independent single person’s incomes. They would most likely be defaulted into too rich of a subsidy. My senior year roommate is due to give birth to her second son in December, so their subsidy would be too low as the family size would be four for the 2015insurance year instead of the assumed three. Finally, we can assume that the Consumer Price Index which drives the changes in the Federal Poverty Levels is positive. 150% Federal Poverty line in 2014 will be several hundred dollars less than 150% FPL for 2015 calculation purposes. So even the people who have had no changes in family size, and made exactly the same in 2014 as they did in 2013, will see a default subsidy that is less than they are entitled for. I am not too worried about that scenario as I know HHS and the IRS will engage in a massive reconcilation effort to make people whole at some point in 2015/2016.


The other major function of subsidy is calculating what the subsidy should be based on. Subsidies are based on the second least expensive Silver plan in the Exchange for the location where an Exchange buyer lives. HHS is assuming two things. First, the second least expensive Silver is the same plan. And secondly, it is the same price. Both assumptions are highly problematic.

In 2014, we hvae seen that the two cheapest silver plans in a region tend to be among the best selling plans. We have also seen the lowest cost policies be much more likelyto see significant price increases than higher cost plans. When I have not had my first cup of coffee in the morning, so I am feeling charitable, I’ll attribute this to primarily a “winner’s curse” scenario where the cheapest Silvers were using the most optimistic defensible assumptions on their pricing models. After my first cup of coffee, and when I am cynical, I’m betting that at least a good chunk of the two cheapest Silvers are loss leaders being used to build out membership as membership tends to be fairly sticky in the insurance industry. In either case, there is a strong motivation for the cheaest plans to increase and the most expensive plans to either increase at a much slower rate or actually decrease premiums. Additionally, there are new plan designs and new competitors entering more markets this year. There is a very good chance that the second lowest price Silver plan changes due to either a new low cost entry, or a plan that was #3/4/5 in the region being priced more aggressively to set the local subsidy line. An individual who was on the second cheapest Silver in 2014 but now is on the 5th cheapest Silver in 2015 will see a significant rise in out of pocket premium costs. Conversely, an individual who had the #4 Silver in 2014 but is defaulted to the #2 Silver in 2015 will see a premium drop.

Furthermore, premiums are projected to increase by 8%  or so. Assuming a static market that is doing nothing but reflect national trends, the baseline second Silver premium support subsidy would be significantly richer. Finally, the premiums for someone age 38 are, all else being equal, a bit cheaper than the premium for someone who is now age 39 in 2015. The default assumptions on the plan side of the equation seem to be weighed towards giving people too little premium support subsidies than too much in most scenarios.

So how could this be improved in 2016?

The short answer is to improve the back-end functionality of Healthcare.gov to allow real time subsidy calculations and a decision support tool that would pick, as the default, the optimal plan based on past family choices. A second best choice would be to integrate IRS and Exchange data for better income calculations, as well as new CMS FQHP data to determine 2nd best Silver to get real time subsidy values and then default people who are in 2nd best Silvers or better to those same plans, while creating a reach out list of people who would see premium/subsidy shock with a fall back option of defaulting them into a random choice of nearly comparable plans at relatively close price points. There is no optimal choice, as different weights attached to different outcomes and hassle factors will lead to different choices. I think that there are significant improvements to more satisfactory choices than the current default system.

25 replies
  1. 1
    Gindy51 says:

    It is the same method UHC uses for Delta Air Lines, if you do not make any changes yourself during the enrollment period, they put you in the same plan as you had the year before. How is what HHS doing any different?

  2. 2

    Somewhat OT, but thoroughly awesome.

    The Satanic Temple has launched a campaign seeking religious exemption from laws that restrict access to abortions, citing the Supreme Court’s Hobby Lobby ruling.

    The group, which “facilitates the communication and mobilization of politically aware Satanists, secularists, and advocates for individual liberty,” argues that states’ “informed consent” laws violate its religious freedom.

    “An increasing number of states have passed ‘informed consent’ laws, requiring that women seeking abortions be subjected to state-mandated informational materials that are often false or misleading,” the group wrote on its website. “We believe that personal decisions should be made with reference to only the best available, scientifically valid information.”

    Yes, the Satanists are now the unquestionable voice of reason in the US.

  3. 3
    Ruckus says:

    @⚽️ Martin:
    Some might argue that they always have been.

  4. 4

    @Ruckus: I wouldn’t dispute that, but at least in this instance I think we have fairly clear evidence.

  5. 5
    Roger Moore says:

    @⚽️ Martin:

    Yes, the Satanists are now the unquestionable voice of reason in the US.

    Or rather, a group of people calling themselves Satanists are the voice of reason. I think they’re basically atheists who are fed up with the Tealibangelicals trying to push their religion on everyone else, and they call themselves Satanists as an effective way of trolling the Christianists. IOW a more in-your-face version of Pastafarianism.

  6. 6
    sam says:

    I was going to make the same point as @Gindy51. My Company’s default (we have UHC too) is that if we don’t change our elections during the open enrollment period, we get stuck in the same plan as the prior year. It’s the lesser of two evils with the other option being getting dropped altogether.

    Of course, given that since this past year our only options are two god-awful high-deductible health-savings-account based plans, I’d rather have a third option that just gives me the equivalent cash that my company pays for my premiums and lets me go on the NY State of Health Exchange, but that’s not a choice I get to make. I really miss traditional co-pays.

  7. 7
    Violet says:

    @Gindy51: This last year, giant corporation specifically said during open enrollment that if we didn’t choose a health insurance option we got NO HEALTH INSURANCE. Not choosing meant choosing none. Options had changed enough that there was no default enrollment into last year’s version.

  8. 8
    Ruckus says:

    @⚽️ Martin:
    Fairly clear evidence is not new, neither is denial of it.

  9. 9
    Davis X. Machina says:

    Listen carefully and you can hear the ghost of Nye Bevan quietly laughing…

  10. 10
    Ruckus says:

    Could this be part of the growing pains that any new large system has to go through? Balancing out all the requirements and possible outcomes has to be tough. Look at two of the commenters in this post @sam: and @Violet:, it sounds like their employers are not playing very well with the concept of insuring their employees, although it may be the insurance company as it sounds like the same one in both cases. Do you expect this to shake out in a year or two and better ways will be defined so as to not screw any of the parties or at least to screw them all equally?

  11. 11
    Roger Moore says:

    It’s different when you’re getting it from your employer, because the model is different. At least with my employer-provided coverage, my employer is the one who’s actually writing the checks, so they know down to the penny exactly how much stuff costs. That means they can deduct exactly the right amount from each employee’s paycheck and there are no surprises at the end of the year.

    With the exchanges, the government is only providing a marketplace where the customer can shop for insurance, and they’re promising a subsidy based on information the customer is providing them. It’s the actual insurance customer who’s writing the checks to the insurance company, and the final subsidy is worked out on the person’s taxes at the end of the year. If the exchange gets inaccurate information- a lot more likely if they’re extrapolating from the previous year- it can lead to big surprises at the end of the year when it comes time to figure out the subsidy.

  12. 12
    Mnemosyne says:


    Here at the Giant Evil, if you don’t choose, you automatically get the bare-bones insurance. Since we’re self-insured (i.e. they hire insurance companies to administer the policies but the GEC pays all of the bills), at some point a few years ago they realized it was cheaper for them to make sure everyone had a basic policy in place than to let people go without insurance.

    ETA: There’s never been default enrollment into last year’s option here — it’s always been “choose one or go without” until the last couple of years, when it turned into “choose one or we choose the lowest coverage for you.”

  13. 13
    Baud says:

    @⚽️ Martin:

    Cute, but a sure loser. Hobby Lobby only applies to the federal government.

  14. 14
    Glidwrith says:

    @Baud: Can you or some other lawyerly soul explain this to me: Hobby Lobby is only applied to federal law, yet when DOMA was struck down (also a federal law), we’ve had the happy domino effect of state bans against gay marriage being struck down left and right.

    How is it that Hobby Lobby won’t be applied to the states?

    The possibility that we may see a similar effect wrt women’s access healthcare through their employer’s good graces terrifies me.

  15. 15
    Baud says:


    lawyerly soul

    Is that like military intelligence?

    In the case of Hobby Lobby, there is a preexisting court precedent that says that generally applicable laws can be applied to religious groups without violating the First Amendment. Hobby Lobby involved interpretation of a federal statute that only applies to the federal government (for reasons I won’t go into), so it’s a different body of law.

    In the case of DOMA, the rationale the Court used to strike down the federal statute on constitutional equal protection grounds is being used to strike down state marriage restrictions on the same constitutional equal protection grounds. There is a closer connection there.

  16. 16
    Omnes Omnibus (the first of his name) says:


    Is that like military intelligence?

    Closer to jumbo shrimp, I think.

  17. 17
    Roger Moore says:


    Is that like military intelligence?

    Not at all. There are plenty of lawyerly souls; they just generally are the legal property of an entity other than the body they inhabit.

  18. 18
    Omnes Omnibus (the first of his name) says:

    @Roger Moore: Sorry, Ohio requires a soulectomy prior to being sworn in. I am not sure how the whole diploma privilege thing works out in Wisconsin.

  19. 19
    Baud says:

    @Omnes Omnibus (the first of his name):

    The worst part of the bar exam was the dementors.

  20. 20
    Omnes Omnibus (the first of his name) says:

    @Baud: FTW!

  21. 21
    Glidwrith says:

    @Baud: Thank you – I had to re-read that about five times before it began to sink in. This is reason #666,666,666 for why IANAL.

  22. 22
    Baud says:


    If you had to read it five times, it was my fault for not writing more clearly. (Between us, I sometimes don’t put a lot of thought into my comments before I submit them.)

  23. 23
    Roger Moore says:


    If you had to read it five times, it was my fault for not writing more clearly.

    I wish more people took this kind of responsibility for their writing.

  24. 24
    GHayduke (formerly lojasmo) says:


    Between us

    Yer doin’ it rong.

  25. 25
    Avi says:

    @Baud: So they change the strategy a bit. A dozen or so states enacted their own RFRAs, and some of them also adopted “informed consent” laws of the sort that the Satanists want to challenge (Kansas and Virginia both come to mind); let them sue in state court. Also, they’ll need to have the doctors/clinics bring suit rather than the women, as the substantially burdensome obligation is furnishing the materials, not reading them.

    Of course, the state courts could interpret their RFRAs in a more limited fashion if they wish, but Hobby Lobby is still persuasive authority.

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